Get Prepared Before Meeting With Your Lender
Here is a question I’m often asked by home buyers after negotiating their best deal on a home: “I am meeting with a loan officer about buying the home. Any tips or suggestions?”
First, you should have your necessary paperwork together:
• Two years tax returns
• Two years W2s
• Current month’s pay stubs
• One month bank statements for any accounts where you have money that will be used for the transaction
That should be enough to get started. You’ll update bank statements and pay stubs once you’re into the process.
There are some potential pitfalls you should keep in mind. First, be aware that you’re going to have to document and paper-trail all money that shows up in the transaction. You’ll do this by giving the lender two month’s bank statements. If there are any “large” deposits (generally understood to be more than 10% of your gross monthly income), you’ll have to document and explain them. This would include transfers from other accounts; you’ll have to provide statements for those accounts as well.
You should avoid moving money around or transferring between accounts while you are actually in the middle of the loan process. I had a client once, an attorney, who said he totally understood the idea of documenting all the money. “It’s like the chain of custody!” he said. When the closing day came, he showed up with a cashier’s check for $150,000—drawn on a bank account I had not seen before. I asked him about it. He said, “Oh, that’s just another account I keep some money in.” He gave me the statements on that account, and I discovered there were large deposits and transfers there. Some were “gifts from relatives,” so we had to get gift letters from those generous donors. It was a paperwork nightmare, and it delayed the closing by over a week. Be warned.
You’ll also have to write letters of explanation for certain aspects of your loan file—like gaps in employment and inquiries to your credit report. Your loan officer can advise you what you’ll need. It is far better to include those necessary items in your file at the time the loan officer submits it to the underwriter than to react to the request later.
The lender will qualify you for your loan based on the Debt To Income ratio (DTI). They’ll calculate this by adding up all your monthly debt payments (credit cards, car loans, student loans, etc.), then your total proposed house payment. That number is the “total debt.” The total debt is then expressed as a percentage of your gross monthly income (before taxes). The maximum is typically 45%. Thus, if your gross income is $6,000, and you have a $200 car payment, your maximum house payment (including taxes and insurance) would be $2,500.
Don’t eliminate the possibility of making a smaller down payment to preserve liquid cash and paying mortgage insurance for a while. Once your loan is just 80% of your home’s value, the lender will let you drop the mortgage insurance. If you made a 10% down payment, you’d have the 20% equity needed in 24 months if the home appreciated at 5% per year. Just something to think about.